July 23, 2019 / 09:35AM / By FBNQuest Research
The direction of average interest rates over the year to Q1 2019 is welcome to the CBN, the monetary policy committee (MPC) and customers of the deposit money banks (DMBs): the prime and maximum lending rates have fallen by 120bps and 110bps respectively, while the term deposit rate has inched upwards by 60bps over the period.
The spreads between lending and deposit rates remain substantial by any criteria, however, reflecting the modest level of financial intermediation and prompting regular calls from the CBN and the MPC for much larger loan books.
There has been a pick-up in credit to the private sector of 12.0% y/y to N24.9trn in May according to the CBN’s broadest headline measure, which would include, for example, DMBs’ loans to state governments.
To provide some perspective, at end-March 2019 total loans and advances by microfinance banks amounted to N208bn; primary mortgage institutions to N156bn; and the state-owned Bank of Industry, Bank of Agriculture and Nexim Bank to a combined N817bn.
These loan books, notably for the Bank of Industry, have rapidly increased but not at a pace to satisfy the CBN and the MPC. Their pressure on the DMBs to lend to SMEs, and sectors with a record for job creation has not abated.
In contrast to the rates for the real economy, the interbank moves sharply in response, inter alia, to the CBN’s open market operations (OMO) and fx transactions, and monthly FAAC distributions to state and local governments.
Selected interest rates (%; averages)
Sources: CBN; FBNQuest Capital Research
Our chart shows that term deposit rates are consistently negative when adjusted for inflation. As an alternative, retail investors could place their monies in mutual funds or FGN savings bonds, for which the latest two and three year issues pay 11.195% and 12.195% per annum respectively.